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The Future Regulation of Funds and Functionaries of Funds in Jersey

As part of the preparation for the forthcoming assessment by the International Monetary Fund (the “IMF”) of the Island’s regulatory framework (which is expected in the second quarter of 2008) the Jersey Financial Services Commission (the “JFSC”) is proposing to reform the regulation of funds and the functionaries of funds. Such proposed reform will ensure that the Island’s regulatory framework measures up to the corresponding international regulatory standards, assist the JFSC to satisfy its long-term aim to bring regulation of all financial services business operating in Jersey within the Financial Services (Jersey) Law 1998 as amended (the “FSL”), and also secure and enhance Jersey’s position as a leading offshore centre for funds business.

In April this year the JFSC published Position Paper No.2 2007 which stated that they have been working since 2003 on “integrating a number of pre-existing regulatory laws into the [FSL]” in order to provide a “one-stop shop” for legislation, to make it easier for the finance industry to understand and comply with.

Prior to publication of the Position Paper the JFSC actively consulted with, and sought the approval of, the finance industry.As a result, it is proposed that the following legislative changes should be implemented:

Separation of the regulation of funds from the regulation of functionaries through moving the authorisation and regulation of functionaries (the service providers, for example, a manager, an administrator or an investment advisor) of collective investment funds from the Collective Investment Funds (Jersey) Law 1998 as amended (the “CIFL”) to the FSL.This will not only help to make the regulatory regime more transparent, but should also make it more efficient;
Removal of the requirement for a functionary to hold separate permits under the CIFL in respect of each collective investment fund for which it carries out work; and
Leave recognised funds as they are and the requirement for a functionary of a recognised fund to hold a permit under the CIFL.

In order for this new legislative regime to be in place prior to the IMF assessment the proposed changes will be introduced in two stages:

The First Stage

The first stage concentrates on the subordinate legislation such as States Regulations and Ministerial Orders, which can be implemented relatively quickly. The first stage orders and regulations are to be considered by the States of Jersey on 6 November 2007 and will, in all likelihood, be in force from 13 November 2007.On the same date, the Funds Services Business Codes of Practice will come into effect (see below).

In brief, this stage will bring the new regime into effect, save in respect of the issue of certificates under the CIFL (see below), and will include the following:

All functionaries of ‘unclassified funds’ (which still may be changed to ‘authorised funds’) will be exempt from the requirement to obtain a permit under CIFL, with the exception of the company issuing units (the “CIU”), the trustee of a unit trust and the general partner of a limited partnership (this of course differs from the current regime which requires functionaries to obtain a permit under the CIFL);
The introduction of the concept of Fund Services Business (“FSB”) into the FSL within the definition of financial services business at Article 2. The functions comprised within FSB will broadly be the same as those listed in the Schedule to CIFL with two important exceptions: (1) a CIU will not be counted as a FSB activity (however, the company itself will still be regulated under the CIFL regime) and (2) a new FSB activity will be introduced being a ‘manager of a managed entity’ which encompasses the business of providing management services to a FSB managed entity under contract such as a money laundering officer, registered office and directors;
Introduction of various Orders dealing with the holding of fund assets, the preparation of accounts and the exemption from the requirement to obtain COBO consent where the fund has been issued with a permit under the CIFL; and
Removal of the exemption for functionaries who hold a permit under the CIFL from having to register under the FSL in order to conduct trust company business or investment business. A functionary registered under the FSL to conduct FSB will be exempt from the requirement to register for the carrying on investment business and/or trust company business.

Grandfathering

As a result of the first stage changes to the regulatory regime all those who currently conduct FSB will need to be registered under the FSL. In order to ensure a smooth transition the JFSC proposes that all existing unclassified fund functionary permit holders (other than the CIU) shall be ‘grandfathered’ into the FSL. This means any existing conditions relating solely to the functionary, and not the fund, will be transferred with its registration under the FSL and will allow the functionary to continue to act for current funds and for any new funds which are similar in type and function.

Since there is no equivalent of the new ‘manager of a managed entity’ under the CIFL, grandfathering will not be possible and therefore those who are currently engaged as manager of a managed entity will need to apply to the JFSC be re-registered under FSL to perform this new kind of activity.The JFSC has requested applications in this regard before close of business on 24 October 2007.

Codes of Practice

All grandfathered businesses will be required to demonstrate appropriate levels of ‘fitness and propriety’ in order to comply with the new FSB Codes of Practice. On completion of the first stage the JFSC intends to issue the Codes of Practice. The Codes are currently in draft form and will be subject to further amendment after taking into account the comments of Industry, changes to the anti-money laundering provisions and the proposed amendments to the Trust Company Business Codes of Practice.

The Second Stage

The second stage will introduce the concept of certificates through changes to the CIFL. The result will be as follows:

the CIU, the trustee and the general partner will be required to hold a certificate instead of a permit;
unclassified funds will be controlled under the CIFL by certificates; and
permits will only be required for recognised funds and the terms ‘functionary’ and ‘permits’ will only apply to recognised funds.

It is expected that the second stage will take longer to implement than the first stage, and therefore it is expected that the changes will be implemented in early 2008.

Fees

With regard to annual fees the JFSC proposes that the Jersey fund company continue to pay an annual fee based on the number of separate pools of assets. It also proposes that all funds issued with an “unclassified fund certificate” pay an annual fee with the result that funds which are constituted as unit trusts or limited partnerships will have to pay an annual fee for the first time. Under the current regime, the only fund structure that pays an application fee is the CIU when applying for a permit.

The JFSC also proposes that umbrella funds continue to pay an application fee for any new sub-funds that may be added and the fees for a recognised fund shall mirror the fee regime for a fund that has been issued with an “unclassified fund certificate”. In respect of functionaries of recognised funds (other than the CIU), the fee regime will mirror that for FSB under the FSL.

Overall, the aim of the changes is to introduce a new regime which will simplify the law governing Jersey funds. In the future the regulation of functionaries will be separated from the regulation of fund; a functionary will be regulated under the FSL to carry on FSB whilst the fund itself will still be regulated under the CIFL. The certainty and transparency which the reform will afford Industry will make it easier for it to market its services in the future.

From the JFSC’s perspective, such reform should speed up the registration and approval process, be fee neutral (with the exception of unit trust and limited partnerships) and reduce its administrative workload. The JFSC acknowledges that the timetable for the proposed reform is ambitious and a number of elements of the reform are outside of its control since the Law Draftsman is going to be rather busy. However, with the collective will of the finance industry, Jersey Finance, the JFSC and the States the new regime will be firmly in place in good time for the IMF assessment with Jersey further advancing its position as a leading offshore fund centre and, attracting new fund service business.

For more information please contact a member of Crill Canavan’s Investment Funds team :-

Andrew Pinel
Advocate, Investment Funds Team
Tel: +44 (01534) 601754
Email

Paul Wilson
English Solicitor, Investment Funds Team
Tel: +44 (01534) 601751
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Carl O’Shea
English Solicitor, Investment Funds Team
Tel: +44 (01534) 601751
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David Dorgan
Jersey Solicitor, Investment Funds Team
Tel: +44 (01534) 601751
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